Economic Growth as a Powerful Mechanism of Country Development

Introduction

Economic growth is the constant rise in a country’s creation of goods and services over a certain period. It is characterized by a general improvement in the living standards of the citizens. Rahman et al. (2018) view economic growth as “the most powerful tool for creating jobs, reducing poverty, and improving the standard of living through improved health status and educational attainment” (p. 564). A nation’s social and economic development is usually estimated by changes in its real Gross Domestic Product (GDP) (Broughel & Thierer, 2019; Rahman et al., 2018). The U.S. Bureau of Economic Analysis (BEA) defines the real GDP as the value of goods and services less by production cost (Bureau of Economic Analysis, 2020b). BEA (2020b) states that a change in a country’s real GDP indicates the overall economic situation. For example, BEA reported a general decrease in the real GDP across the fifty states in the second quarter of 2020, causing a 31.4 percent decrease in the nation’s overall real GDP (see Figure 1). The bureau attributed this decline to the COVID-19 pandemic:

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The decline in second-quarter GDP reflected the response to COVID-19, as “stay-at-home” orders issued in March and April were partially lifted in some areas of the country in May and June, and government pandemic assistance payments were distributed to households and businesses. This led to rapid shifts inactivity, as businesses and schools continued remote work and consumers and businesses canceled, restricted, or redirected their spending. The full economic effects of the COVID-19 pandemic cannot be quantified in the GDP estimate for the second quarter of 2020 because the impacts are generally embedded in source data and cannot be separately identified (BEA, 2020a, para. 1).

Percent Change in U.S. Real GDP
Figure 1. Percent Change in U.S. Real GDP (Bureau of Economic Analysis, 2020)

Since economic growth has been a critical determinant of a country’s social and economic development, economists have sought to research its causes. In so doing, they can establish why some countries are far ahead in development than others. This paper will explore the factors contributing to the high growth rate among countries and then offer possible solutions to nations that are lagging in development.

Why Do Some Countries Grow Faster Than Others?

While there may be no definitive answer to why countries experience varying growth rates, economists have revealed several factors contributing to the growth. According to Rahman et al. (2018), “there is a clear lack of consensus among the researchers about the contributory factors that accelerate growth” (p. 567). However, this study identified some of the outstanding factors that influence growth, which is discussed below.

International Trade

Depending on the availability of raw materials, skilled workforce, and technology, some countries engage in trade with other countries for mutual benefits. Each country gets an opportunity to gain from the exchange since they acquire goods and services, which they either lack or need more (Wolla, 2017). Wolla (2017) asserts that when underdeveloped countries can venture into bilateral trade, they are inclined to acquire capital goods that they can use in supplementing their factors of production. The availability and productivity of these factors of production result in a higher rate of economic advancement. Furthermore, international trade provides a broader market for locally produced goods and services (Wolla, 2017). However, Mutreja et al. (2018) reveal that some countries cannot participate in international trade because of trade barriers. The rationale for using trade barriers such as quotas and tariffs, according to Yabs (2018), is “to protect their domestic economies or restrict consumption of certain goods or services” (p. 2). The same article states that minimizing or lifting these barriers could result in a rise in economic growth.

Government

In most countries, the government has a significant contribution to its economic growth. For example, several studies exist to explain the impact of government expenditure on the country’s growth. Research by Rahman et al. (2018) and Dudzevičiūtė et al. (2018) state that government expenditure affects the economy positively and negatively. Rahman et al. (2018) opine that:

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High government expenditure might come from greater taxing on the people reducing their disposable income; and in the presence of corruption and inefficiency in public spending, specifically in the low-income and lower-middle countries, high government expenditure may be financed by substantial borrowing. This may lead to a crowding-out effect if government expenditure exceeds the threshold level (p. 572).

Research by Dudzevičiūtė et al. (2018) also reports that government spending has significant and adverse effects on a nation’s growth. Dudzevičiūtė et al. (2018) state that “the results have revealed that in the short run, spending on national security, health, transportation, and communication have been positively related to economic growth” (p. 375). Other ways in which the government can impact a nation’s economy include regulations and taxes. These strategies can either vitalize or destroy the economy. Therefore, countries with inefficient governments and poor institutions are bound to lag in economic development.

Technological Innovation

Technological innovation is the advancement in know-how and its application production. Although technological innovation has been condemned as ‘dehumanizing’ and a cause of unemployment for every nation’s labor force, it is a significant driver of economic growth (Broughel & Thierer, 2019). Broughel and Thierer (2019) note that “it seems beyond dispute that a change of technology in the pure sense, coupled with organization changes at various levels of aggregation, are the main driving factors behind the continuous increase of living standards” (p. 13). Although Broughel and Thierer (2019) say that “it is not always clear what cultural, political, or market systems affect the pace of innovation,” technological change is hard to achieve. Some factors that hinder new technology include the high cost of implementation, political factors, and unfavorable market conditions and policies (Broughel & Thierer, 2019). However, countries that invest in market research and can access better technology can register increased productivity, and as productivity increases, the economy also grows. Countries that invest in the acquisition and use of new technology are more likely to experience a higher growth rate than countries with no institutions to initiate these changes.

Conclusion

In conclusion, governments can take some measures to enhance economic growth. One of the measures is encouraging spending among the citizens by reducing taxes levied on products. However, the government should be keen not to collect meager taxes as this is likely to result in external borrowing to supplement its budget. Furthermore, the government should uphold political and economic stability to provide an enabling environment for investment. Another way that the government can enhance economic development is by developing infrastructure in terms of better transport systems such as roads, railway lines, and airlines. If any government, especially those from underdeveloped countries, can implement some of the initiatives mentioned above, sooner or later they may be at par with or even surpass the already developed countries.

References

Broughel, J., & Thierer, A. D. (2019). Technological innovation and economic growth: A brief report on the evidence. Mercatus Research Paper. Web.

Bureau of Economic Analysis. (2020). U.S News Release. Web.

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Bureau of Economic Analysis. (2020). U.S. Economy at a Glance. Web.

Dudzevičiūtė, G., Šimelytė, A., & Liučvaitienė, A. (2018). Government expenditure and economic growth in the European Union countries. International Journal of Social Economics, 45(2), 372-386. Web.

Mutreja, P., Ravikumar, B., & Sposi, M. (2018). Capital goods trade, relative prices, and economic development. Review of Economic Dynamics, 27, 101-122. Web.

Rahman, M. M., Rana, R. H., & Barua, S. (2019). The drivers of economic growth in South Asia: Evidence from a dynamic system GMM approach. Journal of Economic Studies, 46(3), 564-567. Web.

Wolla, S. A. (2017). Why are some countries rich and others poor? Page One Economics. Web.

Yabs, J. (2018). Trade barriers between European Union and East African countries. International Journal of Economics, 3(1), 1-6. Web.

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